Inco Case Study (Background Reading): The End of Monopoly: A New World for Inco (Part 1 of 3)

This reading was prepared by Joe Martin to supplement the class discussion on the Inco case. All charts have been omitted.

The International Nickel Company (Inco) is one of Canada’s oldest mining companies and the only Canadian company ever to be part of the Dow Jones Industrial Average (DJIA). Nickel was discovered by accident in the Sudbury basin in 1883 when the rail lines for the CPR were being driven through the hard rock country.

Despite the discovery two decades earlier, the company was not formed until 1902. J. Pierpont Morgan, one of the richest and most powerful men in the world, had recently created US Steel in the world’s first billion-dollar deal. Morgan decided he wanted to control his major supplier of nickel. In the late 1920s Inco became part of the DJIA and was re-incorporated as a Canadian company.

Back in those days, Inco was not really a Canadian company. Although it was true that Inco had a major refinery at Port Colborne in Ontario’s Niagara region, in addition to the mines in the Sudbury area, it should be remembered that the refinery only came to Canada for two reasons. The first was due to intense lobbying on the part of the Ontario government.The second was known as the Deutschland Incident of 1916, when it was suspected that Canadian nickel was being shipped to Germany via the United States and being used to kill Canadian soldiers during World War I.

The great majority of the company’s shares were held in the United States, with a smaller block in the United Kingdom, although three Canadian businessmen had invested heavily in the company in 1928. They were: J.W. McConnell, the investment dealer and philanthropist from Montreal who represented the Holt 1 interests; J. B. Bickell, the Toronto mining magnate and President of the McIntyre-Porcupine gold mines; and James Richardson,2 the Winnipeg merchant and financier with a strong interest in mining.

Inco, in addition to being owned outside of Canada, had mostly U.S.-based customers. Canada contained the ore body, located in the great Sudbury basin, and the labour force was Canadian. However, control of the company came from the United States, even after re-incorporation. The company had been re-incorporated in Canada, not because Canada was attractive, but because the principal shareholders wished to avoid anti-trust action in the United States.

What follows is a brief history of Inco from its beginnings to the 1950s. In examining the non-Canadian nature of this company, we should remember that Canadian mining companies today — and Canada is a centre of mining in global terms — are often viewed sceptically in the countries in which they are mining, just as Inco was viewed for many years by Canadians.

The Background to the Formation of the International Nickel Company

In the 17th Century, metallurgists were puzzled by a rock that looked like copper but which would not yield copper. They thought that Satan had made the rock to bedevil them. Thus, they named the rock after ‘Old Nick’ (Satan), calling it Kupfernickel, meaning ‘the devil’s copper,’ an entity from which no copper can be made. In the early 19th Century, European production of nickel began, and the mineral was called “German silver.” After 1860, nickel was used increasingly for token coinage.

Total world demand for nickel at that time was only a few million pounds per year. Most of this was supplied by mines owned by Rothschild’s la Société Le Nickel on the island of New Caledonia, a French penal colony in the South Pacific.

All of this changed when a new discovery was made. When just a small quantity of nickel was melted together with steel, the nickel prevented the steel from rusting. This marvel led to the development of a product we take for granted nowadays — an entity known as stainless steel. In the 1880s, the United States Navy became interested in this discovery and its application for armour steel plate. Once the Navy learned that nickel had the potential to provide a defense against missiles that pierced armour, it became interested.

“One million dollars of federal government money, a large sum for the time, was devoted to testing nickel’s possibilities. The trials were a success — nickel-steel was indeed a formidable defensive material. Once its benefits had been proven, there remained only the question of getting hold of sufficient nickel.” (3) As a future President of International Nickel Company (Inco) stated, “The introduction of nickel-steel into armaments was the single most important factor in the development of the nickel industry.”

In 1883, (4) nickel was discovered in the Sudbury area of Ontario, almost by accident, during the construction of the Canadian Pacific Railway (CPR) across the great Canadian Shield. This discovery turned out to be the most extensive nickel find in the world. At the time, however, the discovery did not arouse great interest, because nickel had few uses. Copper, on the other hand, was highly sought after, especially with the demand for copper wire that was created by the new technologies of telegraphy and then telephones.

Inco’s history dates back to 1886, when Samuel J. Ritchie and a group of Ohio partners formed a corporation in Cleveland, the Canadian Copper Company, to mine the nickel-copper deposits of the Sudbury region.(5) Canadian Copper Co. owned the minerals in the ground in Sudbury because post-Confederation politicians succumbed, in 1869, to demands of the Ontario mining community for unencumbered title to mineral lands.(6)

A visiting correspondent from the Times of London wrote, “With a supineness which it is difficult to understand and scarcely possible to justify, the Canadians allow strangers to reap the profits which the mines…yield.” (7) Although the mining itself occurred in
Canada, all processing and refining took place in the U.S.

The Canadian Copper Co. started open bed or heap roasting, as a primitive method of smelting. This process involved putting raw ore onto layers of cordwood, setting it aflame, and letting it smolder for several months. This work began in 1888 at Copper Cliff, a town near modern-day Sudbury. Since Canadian Copper lacked American refining facilities, the company partnered with a New Jersey-based copper and iron smelting company, Orford Co, which had an economical method of refining copper.

The two companies signed a contract for Canadian Copper Co. to supply Orford with 1,000 pounds of nickel-copper matte (a semi-purified metal produced by the first stage of the smelting process.)

The Ontario government appointed a Commission to enquire into mineral resources in 1888, and Sudbury was featured in the review. The decision to establish a Royal Commission was made as a result of a shift in thinking at the provincial level. Whereas in the past, Canadian federal and provincial governments had been meek vis-à-vis the Americans and their extraction of Canadian minerals, those governments were now becoming more pro-active in order to promote the processing of those minerals on their own soil.

The Commission marked a change in official thinking and was the response to a growing interest in the so-called Manufacturing Condition, an Ontario version of the National Policy. This “condition” required that minerals extracted from Ontario soil be processed and refined at home, otherwise the processing and refining company would be subject to tariffs.

One of the challenges faced by the Ontario government in bringing processing of Ontario ore to Ontario rather than having it shipped to the United States in raw form were Canadian and American government policies relating to tariffs and duties. Nickel ore and partly refined nickel “matte” were admitted duty-free by the American authorities, whereas refined nickel carried a 10-cents-per-pound charge. The Canadian government tried to assist Ontario with this challenge by eliminating a 30% duty on mining and smelting machinery as well as removing a $75 per ton duty on smelting coke.

This issue of tariffs on refined nickel became more important in the 1890s when metallurgical research led to the development of new processes for separating copper and nickel. These new processes facilitated the opening up of the Sudbury deposits on a large scale. In a related development, Orford entered the European market and challenged the Rothschild company’s dominance there. This competition resulted in a price war that lasted from 1892 to 1895.

Once the price war was over and the new development process was in place, production and sales of Sudbury nickel jumped more than 80% between 1895 and 1900 (from 3.9 million pounds to 7.1 million pounds). Sales were no doubt helped by the demand for nickel created by the Battles of Manila Bay and Santiago de Cuba in the Spanish American War of 1898. “American warships clad in nickel steel armor destroyed almost the entire Spanish fleet without loss of a single vessel.” (8)

As the distinguished historian Michael Bliss notes, “By 1900, military demand for nickel-steel in the US and Germany was stimulating sale of Sudbury nickel, even as the smelting process denuded the countryside with sulphuric corrosives…. Foreigners dominated Sudbury because they had the technology and marketing ability to refine and sell what was otherwise useless rock.” (9)

By 1901, the Sudbury area mines employed over 2,000 men, compared to less than 700 a decade earlier. Wages had also increased three fold.(10)

The Creation of the International Nickel Company

In 1902, one of the most powerful figures in American business history entered the picture. J. Pierpont Morgan’s newly created US Steel (the world’s first billion-dollar company) made a whopping $10 million purchase. US Steel acquired Canadian Copper Co, Orford Copper Co., and a number of non-operating companies with mining rights in Sudbury Basin and New Caledonia. This organization formed the International Nickel Co., which was incorporated in New Jersey on January 6.

As O.W. Main notes, “Canadian Copper owned the largest mines and Orford had an economical method of refining the metal, and more importantly, the market contacts.” (11) US Steel appointees, plus a representative from Sullivan & Cromwell, the law firm that had engineered the acquisition, dominated the new nickel company’s board. For J. Pierpont Morgan, the acquisition was an important step, since the nickel companies were major suppliers to US Steel.(12)

The owner of the Orford smelter was Colonel R.M.Thompson, a former naval officer. Thompson became Chairman of the new company, which was dominated by US Steel executives. Ambrose Monell of Monell metal fame was elected President. Robert C. Stanley, future long term President, was appointed superintendent of the New Jersey works.

At the time of the International Nickel Company’s creation in 1902, the market was shared, by agreement, among three major players. They were: International Nickel; the French company Le Nickel, which had deposits not only in New Caledonia but also in Norway; and Mond Nickel Company, the English organization, which possessed both a refining process and contracts in the European market.

In most major timelines of Canadian Business History the creation of the International Nickel Company is listed as the first corporate development of the 20th Century. The 19th Century refers much more to the Hudson’s Bay Company, the CPR and Eaton’s. Inco is much more similar to the Hudson’s Bay Company than to the CPR or Eaton’s, because, like the Bay, Inco was previously owned by foreign capital and its markets were outside Canada. Only its resources and its work force were Canadian.

(1) Sir Herbert Holt was not only President of the Royal Bank but possibly the most powerful Canadian businessman ever, with wide interests in pulp and paper, textiles, utilities, coal and steel industries.

(2) Richardson’s son, James, joined the Board of Inco in 1960 and held a Board position until 1968 when he was appointed to the Trudeau cabinet. He was succeeded on the Board by his brother George.

(3) P. 188, Mining in World History by Martin Lynch.

(4) Six years earlier, a nickel mine in Orford, Quebec was purchased by W.E.C. Eustis. Following this purchase, Orford Nickel Company, a predecessor company of Inco, was organized. Robert M. Thompson became general manager. A smelter was established in New Jersey in 1881 and Thompson bought out Eustis’ interest.

(5) Ritchie, among other things, lobbied both the U.S. and Canadian governments to reduce or eliminate tariffs on mineral resources.

(6) Mining regulations were tightened in the 1890s and property was subjected to royalty or enforced development.

(7) p. 160 of Times Correspondent W. Fraser Rae’s book Newfoundland to Manitoba.

(8) p. 121, For the Years to Come by John F. Thompson and Norman Beasley

(9) p. 316, Northern Enterprise by Michael Bliss.

10 p. 150, op. cit., Thompson.

(11) p. 255, “International Nickel: The First Fifty Years” by O.W. Main, Director of the School of Business, University of Toronto in Canadian Business edited by David S. Macmillan, McClelland and Stewart, 1972

(12) One of the Directors was Joseph Wharton, co-founder of Bethlehem Steel and founder of the Wharton School at the University of Pennsylvania. Wharton was the first American refiner to produce a malleable nickel (p. 21 of John Thompson’s ‘For The Years to Come”). Another was Charles M. Schwab, first President of US Steel and founder of Bethlehem Steel.